IB DP Economics: Why economics, and how economists think

This guide follows the IB Diploma Programme Economics guide (first assessment 2022, published February 2020), the course examined from the 2022 session onwards. It covers sub-topics 1.1 (What is economics?) and 1.2 (How do economists approach the world?), which make up Unit 1, Introduction to economics. Both sub-topics are SL and HL content, and the guide marks no HL-only material in either. The recommended teaching time is 10 hours for SL and for HL.

Use it with the revision notes and the practice set. The course hub is at IB DP Economics, and the printable checklist lets you tick off each statement. Try the free 10-minute diagnostics to find gaps.

Every country, firm and number in the examples is made up.

Unit 1 at a glance

Part	Skills the guide expects	SL/HL
1.1 Economics as a social science	Explain the social nature of economics, micro versus macro, and the nine central concepts	SL and HL
1.1 The problem of choice	Explain factors of production, scarcity, opportunity cost, free goods, the basic questions and economic systems	SL and HL
1.1 The PPC model	Explain its assumptions and features, and draw the diagrams	SL and HL
1.1 Modelling the economy	Draw and explain the circular flow with leakages and injections	SL and HL
1.2 Economic methodology	Distinguish positive from normative economics; explain hypotheses, models, ceteris paribus, evidence and refutation	SL and HL
1.2 Economic thought	Outline how ideas developed from the 18th to the 21st century	SL and HL

The guide lists two diagram types for this unit: the production possibilities curve and the circular flow of income.

Economics as a social science

Economics studies how people interact to improve their economic well-being. It is a social science because behaviour is shaped by values, politics, history and psychology as well as by logic and data, so results are rarely exact.

Microeconomics looks at individual decision-makers and markets: a household, a firm, the market for one good. Macroeconomics looks at the whole economy: output, employment, the price level, trade.

The guide introduces nine central concepts. Learn a short definition of each.

Concept	Short meaning
Scarcity	Wants are unlimited but resources are limited
Choice	Scarcity forces decision-makers to pick between alternatives
Efficiency	Making the best use of resources, with little waste
Equity	Fairness in how income, wealth or opportunities are shared
Economic well-being	The overall standard of living and quality of life people enjoy
Sustainability	Meeting present needs without reducing what future generations can have
Change	The economy is dynamic; conditions, tastes and technology keep shifting
Interdependence	Decision-makers rely on one another, so one choice affects others
Intervention	Action, usually by government, to alter how markets work

The problem of choice

Factors of production

Resources used to make goods and services are grouped into four factors.

• Land: natural resources, including soil, water, minerals and forests.
• Labour: the work effort of people, including their skills.
• Capital: man-made goods used to produce other goods, such as machines, tools and buildings. Money itself is not capital in this sense.
• Entrepreneurship: organising the other factors, taking risks and innovating.

Scarcity and sustainability

Human needs and wants are unlimited, while resources are limited. That gap is scarcity, and it exists in every society, rich or poor. Scarcity also links to sustainability. Using up a non-renewable resource today leaves less for later, so choosing now affects future choices.

Opportunity cost

Opportunity cost is the value of the next best alternative given up when a choice is made. It need not be measured in money.

Worked example (illustrative). Tamsin lives in the fictional country of Pellora. She can run her own bakery, which would earn her 26 000 crowns net in a year. Her alternatives are a full-time chef’s job paying 24 000 crowns or a full-time job at a flour mill paying 21 000 crowns. She can do only one.

The opportunity cost of running the bakery is the best alternative forgone: the chef’s job, 24 000 crowns. It is not 24 000 + 21 000 = 45 000, because she could never have taken both. The bakery still wins: 26 000 − 24 000 = 2 000 crowns better off.

A free good has no opportunity cost because using it does not reduce what anyone else can have. Sunlight falling on a field is an example. Most goods are economic goods: they use scarce resources and so have an opportunity cost.

The basic economic questions

Every society must answer three questions: what and how much to produce, how to produce it (which methods and resource mix), and for whom to produce (who gets the output).

Answering the questions: economic systems

System	Who answers the questions	A strength	A weakness
Free market economy	Households and firms, through prices and private ownership	Responds quickly to changing wants	May leave out people with little income
Planned economy	A central authority sets output and allocation	Can direct resources to national goals	Hard to match output to wants; little incentive to innovate
Mixed economy	Markets for most goods, with government intervention	Combines price signals with a safety net	Intervention can be costly or mistimed

Real economies are mixed.

The production possibilities curve (PPC)

The PPC shows the maximum combinations of two goods an economy can produce when all its resources are fully and efficiently used.

Assumptions: only two goods are considered; the quantity and quality of resources are fixed; technology is fixed; and, for points on the curve, resources are fully employed and used efficiently.

Worked example. The fictional economy of Kestria makes boats and wheat. Its PPC is given by these combinations.

Point	Boats	Wheat (tonnes)
A	0	100
B	10	96
C	20	84
D	30	60
E	40	0

Wheat given up per extra boat:

• A to B: (100 − 96) / 10 = 0.4
• B to C: (96 − 84) / 10 = 1.2
• C to D: (84 − 60) / 10 = 2.4
• D to E: (60 − 0) / 10 = 6.0

The cost rises at each step, so the curve bows outwards.

Features of the model

• Scarcity: points beyond the curve are unattainable with current resources.
• Choice: the economy must pick one point on the curve.
• Opportunity cost: moving along the curve means gaining one good by giving up some of the other.
• Efficiency: points on the curve use resources fully and efficiently.
• Unemployment of resources: a point inside the curve means some resources are idle or wasted.

In Kestria, 20 boats with 70 tonnes of wheat is inside the curve: point C shows 84 tonnes is possible, so 84 − 70 = 14 tonnes is wasted.

Increasing versus constant opportunity cost

Resources are rarely equally good at making both goods. The first workers moved into shipbuilding are the best suited and cost little wheat; later ones cost more. That gives increasing opportunity cost and a curve bowed outwards. A straight-line PPC shows constant opportunity cost: resources are equally suited to both goods.

Worked example. Suppose a second fictional economy can make 100 tonnes of wheat or 50 boats, with a straight-line PPC. Opportunity cost of one boat = 100 / 50 = 2 tonnes of wheat, at every point. Making 20 boats gives up 20 × 2 = 40 tonnes, leaving 100 − 40 = 60 tonnes.

Growth and the PPC

• Actual growth: the economy moves from a point inside the curve towards it, by using idle resources. The curve stays put.
• Growth in production possibilities: the curve shifts outwards, because there are more or better resources or improved technology. If only one good benefits, the curve pivots out on that axis.

Modelling the economy: the circular flow of income

The circular flow shows how money, goods and resources move between decision-makers. It makes interdependence visible: your spending is someone else’s income.

In the basic model, households supply factors of production to firms and receive income. They spend that income on goods and services from firms. The extended model adds the government (taxes and spending), the banks and financial sector (savings and loans) and the foreign sector (exports and imports).

Leakages (withdrawals from the flow)	Injections (additions to the flow)
Savings (S)	Investment (I)
Taxation (T)	Government spending (G)
Imports (M)	Exports (X)

Worked example. In the fictional economy of Pellora, a year’s figures in billions of crowns are S = 60, T = 90, M = 70; I = 80, G = 100, X = 40. Leakages = 60 + 90 + 70 = 220. Injections = 80 + 100 + 40 = 220. They are equal, so the flow of income is stable. If investment rose to 110, injections would be 250, exceeding leakages by 30. Income would tend to rise until leakages grew to match.

Positive and normative economics

Positive economics deals with statements that can be tested against evidence: what is, was or will be. Normative economics involves value judgments: what ought to be. “Pellora’s unemployment fell last year” is positive: you can check it. “Pellora should cut unemployment before anything else” is normative: it depends on what you value. Policy-making needs both.

Equity and equality

Equality means sharing in equal amounts. Equity means fairness, which may involve unequal treatment. If a government has 30 crowns to give to three households, giving 10 to each is equal. Giving 20, 10 and 0 to households with low, middle and high incomes may be called more equitable. Whether either is “fair” is a normative judgment.

Economic methodology

Positive economics follows a method.

1. Logic builds hypotheses and theories from assumptions.
2. A hypothesis is a testable claim about a relationship.
3. A model simplifies reality to focus on key relationships; a theory is a set of related, tested ideas.
4. Ceteris paribus means “all other things being equal”. Economists change one variable and hold the rest constant, so that its effect can be isolated.
5. Empirical evidence (data and observation) tests the hypothesis.
6. Refutation: evidence that contradicts a hypothesis means it must be rejected or revised.

Worked example. In the fictional city of Dunmere, the hypothesis is: “If bus fares fall, ceteris paribus, journeys increase.” A fare cut from 4 to 3 crowns is followed by journeys rising from 12 000 to 13 800 a week, a rise of 1 800, or 15%. That is consistent with the hypothesis. But fuel prices doubled the same month, which may have pushed drivers to buses. Because other things did not stay equal, the data cannot cleanly confirm or refute the hypothesis.

Economic thought

Period	Ideas to know
18th century	Adam Smith and laissez faire: markets guided by self-interest can serve society, with limited state interference
19th century	Classical microeconomics (utility); the concept of the margin; classical macroeconomics and Say’s law (supply creates its own demand); the Marxist critique of classical thought
20th century	The Keynesian revolution (demand can fall short and cause unemployment); the rise of macroeconomic policy; the monetarist and new classical counter-revolution
21st century	Dialogue with psychology and the growing role of behavioural economics; awareness of links between economy, society and environment; the case for a circular economy

Keynes challenged the view that economies reliably return to full employment on their own. The guide’s theory of knowledge questions ask how realistic models are.

Common errors

• Writing opportunity cost as a list of everything given up. It is the next best alternative only.
• Drawing a PPC without labelled axes.
• Calling a point inside the PPC “efficient”. It signals unemployed or wasted resources.
• Showing growth as a move along the curve. Growth in production possibilities is a shift or pivot.
• Treating “should” statements as positive.
• Listing imports as an injection.

Next steps

Revise with the revision notes, then try the practice questions. Next in the course comes demand, supply and market equilibrium. For the course layout see the IB DP Economics syllabus guide, and for exam technique see IB DP Economics exam preparation.

Official syllabus

IB Diploma Programme Economics guide, first assessment 2022, published by the International Baccalaureate Organization (February 2020): Unit 1, sub-topics 1.1 and 1.2.